Earnings Call: Q1 2018

Apr 20, 2018

Good morning, everyone, and welcome to the Citizens Financial Group First Quarter 2018 Earnings Conference Call. My name is Kevin. I'll be your operator today. Currently, all participants are in a listen only mode. Following the presentation, we will conduct a brief question and answer session. As a reminder, this event is being recorded. Now I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin. Thanks so much, Kevin, and good morning, everybody. We really appreciate you joining us today. We're going to start things off with prepared remarks from our Chairman and CEO, Bruce Samson and CFO, John Wood, who will review our Q1 results, and then we'll open up the call for questions. We're really happy to have in the room with us today Brad Connor, Head of Consumer Banking and Don McCree, Head of Commercial Banking. In addition to our release, we have a presentation and financial Supplement available at investor. Citizensbank.com. And I need to remind you that our comments today will include forward looking statements, which are absolutely subject to risks and uncertainties. We provide information about the factors that may cause our results to differ materially from expectations in our SEC filings, including the Form 8 ks we filed today. We also need to remind you that we utilize non GAAP Financial Measures and provide information and reconciliation of those measures to GAAP in our SEC filings and our earnings release material. And with that, I'll hand it over to Bruce. Okay. Thanks, Alan. Good morning, everyone, and thanks for joining our call today. We're pleased to report that we're off to a good start to 2018. We continue to deliver good top line growth. We had 5.6% year on year revenue growth. We're also doing a nice job of managing expenses. This resulted in positive operating leverage of 2.1%. Our ROTCE improved to 11.7% as we chart our course towards our new medium term targets of 13% to 15%. We achieved year on year average loan and deposit growth of 3%. In the Q1, We saw linked quarter spot an average loan growth of around 1%. Based on our pipelines, we feel this will pick up as the year progresses. Similarly, based on strong capital markets pipelines and the benefit of seasonality, we expect to see some good fee growth in the second quarter. We continue to execute well on our strategic initiatives, building out our customer coverage and our product capabilities, while making critical investments in technology, in our digital platform and data capabilities, as well as in our customer experience initiatives. We continue to find new ways to streamline our processes and organization in order to become more efficient and to self fund these investments. Our projects TOP and BSO are delivering consistent results. And as you may suspect, We are working hard on the development of top 5. Stay tuned for our July call and for more details. We continue to make progress in building excellence in our capabilities. We're now gaining some external recognition for our progress. For example, we were named the number one bank in the U. S. In terms of customer experience by Temkin. We also were ranked the best bank by Global Finance Magazine in the Northeast and in the Great Lakes regions. There's certainly more work to do, but We're making good progress and we're poised for a strong 2018. We have a good plan. We have a good leadership team that's executing well across the board, and we have an engaged and motivated colleague base. So with that, let me turn it over to our CFO, John Woods, who will take you through the numbers in more detail and provide you with some color. John? Thanks, Bruce, and good morning, everyone. Let's get started with our Q1 results on Page 4. We continue to execute well and are off to a good start to the year. We generated net income to common shareholders of $381,000,000 diluted EPS of $0.78 and ROTCE of 11.7%. Last year's Q1 and Q4 reported results are impacted by notable items largely related to tax matters. So to make it easier to see underlying trends, let's turn to Page 5 and we will focus on our underlying results that exclude these items. Year on year growth in Q1 was very strong as we grew net income to common shareholders by 31% and EPS by 37%. This reflects our continued focus on driving positive operating leverage, which came in above 2%, along with favorable credit costs and a lower tax rate due to tax reform. Strong net interest income and a continued focus on expense discipline helped deliver an efficiency ratio improvement of 125 basis points to 60.4%. We also see the impact of disciplined risk management on our credit quality metrics as we continue to drive improvement in the mix of the portfolio overall. Provision expense came in at $78,000,000 for the quarter, which was a little lower than expected despite an $8,000,000 build in the reserve. Non performing loans remain relatively stable at 78 basis points of loans. We continue to actively manage our capital base, returning $283,000,000 of capital to shareholders through higher dividends and share repurchases. Tangible book value per share increased 5 percent year over year to $27.24 and our CET1 ratio was a robust 11.2%. Taking a deeper look into NII and NIM on Page 6, we delivered attractive and disciplined balance sheet growth, which helped drive a 1% linked quarter increase NII in spite of the impact from day count. We benefited from the earlier than anticipated move in 1 month LIBOR this quarter and a relatively steeper yield curve overall for much of the quarter. As a reminder, approximately 75% of our sensitivity is associated with the short end of the curve. Linked's quarter net interest margin increased 8 basis points, reflecting improving earning asset yields given higher rates and improved mix, which drove a 16 basis point improvement. This was partially offset by an 8 basis point impact from higher funding costs. Year over year net interest margin improved 20 basis points, reflecting a 42 basis point benefit from earning assets, partially offset by a 22 basis point impact Funding Costs. Our margin performance continues to benefit from our balance sheet optimization efforts, which again drove about 1 third of our year over year NIM improvement. We also continue to be well positioned to capitalize on the rising rate environment with our asset sensitivity relatively stable at 5%. Turning to fees on Page 7. On an underlying basis, non interest income decreased 4% linked quarter, reflecting an expected seasonal decline in service charges as well as a reduction in mortgage banking fees and trust and investment services is largely related to the impact of long term rates on product demand. In mortgage, our originations were down about 19% in line with overall industry headwinds given rates and a shift away from refi volume. We are making investments to grow our MSR portfolio and to shift production towards more conforming volume. In Wealth, investments in the business are helping to drive improvement in the mix of our fee based sales, which came in at 42% this quarter. However, we saw a reduction in transaction fees from strong 4th quarter levels, which was paced by strength in fixed rate annuity sales. Capital Markets fees declined modestly from 4th quarter and 1st quarter as there was a market fall off in middle market syndicated transactions. As a partial offset, we did see a pickup in debt and equity capital markets activity, which benefited underwriting fees. Our capital markets pipelines look very robust heading into the 2nd quarter, including several deals that were originally targeted for the Q1. Overall, the pipelines have improved significantly since the start of the year. Turning to expenses on Page 8. On an underlying basis, expenses were up 3% linked quarter, reflecting seasonally higher salaries and employee benefits. Outside services were seasonally lower and other operating expenses reflect lower insurance and pension costs. Year on year, our expenses were up 3% on an underlying basis as salaries and benefits expense Higher, reflecting annual merit increases, increased stock based compensation costs, revenue based incentives and the impact of strategic growth initiatives. We also saw an increase in outside services costs tied to our consumer strategic growth initiatives. We continue to remain disciplined on the expense front as we identify opportunities to streamline our operations and organization to find efficiencies. This allows us to self fund our growth initiatives and enhance our capabilities to serve customers. Let's move on and discuss the balance sheet. On Page 9, you can see we continue to grow our balance sheet while expanding our NIM. Total average and spot loans were up 1% on linked quarter basis and 3% year over year with core loan growth rates slightly higher. We grew the average core retail portfolio 5% year over year with expansion in residential mortgages and higher risk adjusted return categories like education, which is largely tied to our refinance product as well as nice traction in other unsecured retail loans driven by our merchant financing partnerships and our personal unsecured product. This growth was partially offset by planned reductions in the auto portfolio and runoff in home equity given high levels of payoffs in line with industry trends. On a spot basis, core retail loans were up 4% year over year and relatively stable linked quarter given the auto and home equity trends. Average core commercial portfolio growth of 2% year over year reflects strong momentum from our geographic expansion strategies, private equity, industry verticals and commercial real estate. On a spot basis, the commercial core loan growth came in at 3% year over year and 2% linked quarter. Growth was impacted by the by the sale of about $190,000,000 of commercial loans late in the Q1 as part of a strategy to source, underwrite and distribute leverage loans, as well as some softer results in small business lending. We expect to deliver stronger loan growth in the 2nd quarter. This reflects the strong Q1 spot growth in Commercial Banking and overall strength in their lending pipelines, which are up over 35% from the beginning of the year through mid April. Additionally, in retail, we expect particular strength in education finance, higher seasonal volume and our continued investments in the space as well as the renewal of our flow agreement with SoFi for high FICO Score Loans. On Page 10, looking at the funding side, we saw a 6.5 basis point sequential quarter increase in our cost of deposits, reflecting the impact of higher rates and spot deposit growth of 1%, partially offset by progress on our initiatives to control deposit costs. We continue to fund attractive balance sheet growth at accretive risk adjusted returns. Our overall funding costs were up 9 basis points sequentially. Year over year, our cost of funds was up 25 basis points, reflecting deposit cost increases of 20 basis points as well as the structural shift to more long term borrowings, including our $750,000,000 senior debt issuance near the end of the Q1. Year on year spot and average deposit growth was 3%. Note that while funding costs were up 25 basis points, overall asset yield expansion was 43 basis points. Our deposit betas remain in line with our overall expectations given where we are in the rate cycle. We did see our betas tick up a little, which is what you would expect to see in a quarter following the Fed hike, but we are right on our expected glide path. Our cumulative beta on interest bearing deposits is in the mid-20s. We've seen some increased competition for deposits, but for the most part deposit costs have been well behaved. We are continuing to invest in analytics and improve our targeting through digital and direct mail offerings on the consumer side, and we're continuing to migrate away from our historical approach to promotional pricing. In commercial, we are making investments to build out additional product capabilities and roll out our new cash management platform early next year. We feel good about our ability to execute against our optimization strategies and drive greater efficiency in deposit gathering. Next, let's move to Page 11 and cover credit. Overall credit quality remains strong, reflecting the ongoing mix shift towards high quality lower risk retail loans and a relatively clean position in the commercial book. The non performing loan ratio improved slightly to 78 basis points of loans linked quarter while improving 19 basis points year over year. The net charge off rate improved 26 basis points from 28 basis points in the 4th quarter given seasonal impacts. Our commercial charge offs were very low again this quarter and Retail net charge offs were $3,000,000 lower than the 4th quarter, primarily due to seasonality in auto and education. Provision for credit losses of $78,000,000 was $8,000,000 above charge offs. Despite this reserve build, the provision was down $5,000,000 compared to the 4th quarter and down $18,000,000 versus a year ago, reflecting improvement in overall credit quality. On Page 12, you can see that we continue to maintain robust capital and liquidity positions. We ended the quarter with a CET1 ratio of 11.2%. This quarter, we repurchased 3,900,000 shares and including dividends returned $283,000,000 to common shareholders. On Page 13, we have provided color on how we are progressing against our strategic initiatives. We've changed the slide in order to highlight some of the progress we're making against our efforts to optimize the balance sheet, investments in our fee generating capabilities and our top Program Revenue and Efficiency Initiatives. We also wanted to highlight some interesting things that are going on in the businesses. Overall, we are executing well and our top 4 program, which is on track to deliver $95,000,000 to $110,000,000 of pretax run rate benefit by the end of 2018. The top programs have successfully delivered efficiencies that have allowed us to self fund investments to improve our platforms and product offerings, while achieving profitability goals. We are already looking at opportunities to find further efficiencies in the future by expanding the work we are doing around customer journeys, Lean Process Improvements and Agile Ways of Working to More Areas of the Bank. I can tell you that we are constantly challenging ourselves to do better, and we have plenty of wood left to chop in the efficiency area. Let's turn to our 2nd quarter outlook on Page 14. We expect average loan growth to come in at about 1.5% and we expect NIM to be up modestly in the quarter. In non interest income, we are expecting to see a mid single digit pickup from seasonally lower first quarter levels. We expect to keep expenses broadly stable in the Q2 with positive operating leverage and with efficiency improving. We expect the credit environment to continue to be relatively benign and that provision expense will push a little higher into the $80,000,000 to $90,000,000 range. On the tax rate, we came in a little lower than expected for the Q1 given a change in timing on certain tax items that moved to Q2 from Q1. For the Q2, we are expecting our effective tax rate to come in at about 23%. To sum up on Page 15, we feel like we've delivered solid results in Q1. We feel our balance sheet across capital, liquidity and credit position remains robust. We will maintain our mindset of continuous improvement in 2018 and look to drive more top and BSO program benefits. We are also driving innovation across the bank and investing heavily in technology, our digital platform and customer journeys, which positions us well as we work towards becoming a outperforming bank. We will maintain our mindset of continuous improvement in 2018 and look to drive more top and BSO program benefits. We are also driving innovation across the bank and investing heavily in technology, our digital platform and customer journeys. And this And lastly, we are positive about our outlook for the Q2 and the rest of the year, and we reiterate broad full year 2018 guidance, although we expect we'd be better than the guidance range on credit. With that, let me turn it back to Bruce. Okay. Thanks, John. Kevin, I think we can open it up for Q and A now. Thank you, Mr. Van Saun. We are now ready for the Q and A portion of the call. And the first question comes from the line of Matt O'Connor, Deutsche Bank. Your line is now open. Good morning. Hi. Yes, I was just wondering if you could talk a bit more about the fee revenues. We're seeing some other banks as well, but just kind of some softness across a number of categories. And you were pretty clear about capital markets pipeline being strong and and bouncing nicely in 2Q. But just some of the other categories were also a little bit soft and wondering kind of what that says about Just the underlying activity among the customer base and maybe why that is the curious? Sure. Why don't I and then we can pass it around here for color. But Matt, I would say, probably The disappointments in Q1 really capital markets where we saw, I'd say a number of transactions push from Q1 to Q2. We, I think, had seasonal slowness at the start of the year. Things seem to pick up nicely in March, although, as I said, Didn't get everything done. So that bodes well for, I'd say, a quite positive outlook in Q2 in Capital Markets. The other area that I'd call out is the mortgage business where I think there was just general market softness. So there's a shift away from refis, the rates has gone up. And so it was just a tougher quarter than we expected in the mortgage space. Most of the other lines, I would say, were really just impacted by seasonality. We get an extra day in Q2. 2, we get some seasonal benefits, service charges and fees is always up. So there's things that we anticipate when we give the guidance for Q2 that We have pretty good visibility into. So, John, I don't know if you want to add to that. No, I think that's right. I mean, I think you're seeing as we get to the end of the quarter, we mentioned that pipeline is looking much better in capital markets as we get into the Q2. A little bit of seasonality on in the IRP space. And as you mentioned in mortgage, although it was a down quarter, we're seeing Some improvement in our conforming mix. So that'll bode well going forward as well. Yes. Okay. And then just that's helpful. Just separately, if we look at the deposits, the non interest bearing demand deposits continue to grow year over year. Obviously, there's some seasonality linked quarter, but you're still growing those year over year. Some of the bigger banks are seeing outflows. And I'm just wondering if you could talk about maybe how your mix is a little bit different or do you think it's more granular in terms of why you're still able to grow the free deposits in this higher rate environment. John, why don't you start and then Brad offer some color? Yes, I think that's right. I mean, we did see that we've been investing a lot in over the last couple of years, as you know. And on the deposit, I think this is a reflection of our deposit initiatives starting to take hold. On the consumer side, we're seeing some traction. We've been investing in data and analytics. We've been improving our targeting and promotional efficiency, and that's starting to play itself out. We've revised our promotional approach to attract more stable deposits at attractive rates and the emphasis is basically shifting from rate led to more of a moderating on rate and starting to close the gap a little bit on marketing. We've been extending the duration and targeting direct mail in lieu of mass promo. So That's nice to see on the consumer side. And similar themes on the commercial side, where we've been making ongoing investments in our product offerings and targeting certain segments where deposits are more likely to be able to be driven versus others. So, yes, we're pleased to See that improvement and those investments will continue. Yes. John, I think you hit it. I think the big thing for us has been the improvement in analytics and Targeted Offerings. The other area that you didn't touch on is, and we've signaled this for several quarters in a row now, is our focus on our massive Fluent Affluent customer base and redesigning the value proposition and the product set for that. So We relaunched a whole new value proposition, our Platinum product suite, I guess, about a year ago. We just think we're getting good traction from that and the investment in analytics. And some of the interest freeze are coming with that initiative. Exactly. Yes, exactly. Okay. Thank you. All right. Your next question comes from the line of Ken Zerbe, Morgan Stanley. Your line is open. Great. Thank you. Yes, you're on a bad line, Ken. You're on a bad line. Is this better? A little bit. A little bit. Okay. Sorry. Hopefully, this will be clear. That's good to know. Now you're good. Okay. If we do get SIFI reform, you guys are no longer subject to CCAR. Can you just talk about how you think about accelerating capital return? Has your thinking changed at all over the last several months or quarters? I'd say, we're probably more optimistic that we can Maybe move down our glide fast path a little faster overall. But generally, I think we've been measured in terms of bringing the capital down, I think as a relatively new public company with not a very long track record that that's a sensible approach. We're thinking 40 basis points, maybe 50 basis points this year was the target we set out at the beginning of the year. As you know, last year, we stayed at 11.2%. We were trying to get down to the 10.7% to 10.9% range, But because we overshot and did better than our budget and we also had the benefit of tax Reform on our DTL. We ended up with earnings that we couldn't return to shareholders given the way CCAR works. So one of the things that we're actually excited about is the de designation and then also the new proposal for the stress capital buffer, which I think gives more flexibility back into the hands of the banks. And so you have guardrails about where you need to operate, but then you also if you have situations like we had where You're outperforming and making extra income. You can potentially return that to shareholder as the year as you're in the middle of the year as opposed to waiting for the next cycle, which is a real benefit or if you were anticipating you were going to get 6% loan growth and it turns in to be 4%, then you can do something with that capital that's piling up. So anyway, I'd say, in general, we feel more positive, but I think we'll continue to be measured and We'll just bring this down. And as I said in the past, there's no reason that we need to be above the median of our peers. Our stressed Credit losses are actually slightly below the median. And so over time, I think we can certainly slide it right into where the median of our peers are. All right, great. And then separately with your NIM guidance, can you just help reconcile the 5% Asset sensitivity you guys mentioned versus the guidance that NIM should be up only modestly in Q2 given the rate the recent March High Cliff. What are the pluses and minuses there that would limit the NIM expansion? Thanks. Yes, I'll go ahead and take that. Thanks. And I think you should know that, as we mentioned the NIM performance in the Q1, we did have and earlier 1 month LIBOR benefit. So that was up maybe about 9 basis points on average. And by March, 1 month LIBOR was 20 basis points higher than we had expected at the beginning of the quarter. And so we're not planning on that recurring. So that would be one item that I would highlight in terms of the Q2. Also, we mentioned that there was a big increase in the long end in the Q1, which had an impact on our premium amortization in our securities book, which was slowed down as a result of that movement. And you wouldn't necessarily plan on seeing that happening again in the second quarter. Lastly, I'd highlight the fact that the full quarter mix shift in our funding, where we did a senior unsecured issuance at the end of the Q1 and you'll see the full quarter effect of that in the Q2. So those are some of the takes. But nevertheless, even with all of that, We're still expecting that NIM will expand and that's given by our ongoing asset sensitivity driven by the fact that loan yields are expected to be up again And up very nicely with good solid loan beta offsetting our deposit beta in the Q2. Great. That's very helpful. Thank you. And your next question comes from the line of Peter Winter, Wedbush Securities. Your line is now open. Good morning. I was curious about the guidance for net interest income for the full year. Last quarter, you said it was 7% to 9%. It does seem like the margin is coming in better than what you expected for the full year, and you're getting that rebound in loan growth. So I'm just wondering you could talk about the guidance for the full year on net interest income. Yes. What I would say, Peter, is we We're just broadly saying that we hold to what we said. I think you could go down each of the major income categories And we're not we haven't been specific on that, but given trends, certainly net interest income is pushing out to the upper side of the bound with the NIM performance. And I still think that we'll see a decent level of loan growth over the course of the year. And then kind of when you go down, I still think we can hit the range for fee growth and the expense growth is tracking to be in the range. And the one thing that John called out is that, I think given the Q1 result and the guide for 2nd quarter on credit that we're likely to be certainly below the range we set on credit. So that's a little more color for you, but where we really try to focus our comments on these quarterly calls is the upcoming quarter and not get into reforecasting explicitly that full year guidance, but we're certainly comfortable with the numbers we put out there for the full year back in January. Thanks. And just a follow-up, is there any update you can give on your Apple partnership and also just the personal unsecured lending and how that's going. Yes, I'll just start and I'd say that Our view is that we have a very strong relationship with Apple that's centered around our shared focus on customer experience, And we would continue to see growth in the relationship. And then secondly, on the personal unsecured product, We really launched that with a vengeance maybe 18 months ago, and we've had a tremendous take up. We're using our data analytics capability to target not only our customers, but also prospective customers, and we're bringing new customers into the bank, and I think that's going exceptionally well. But I'll turn it over to Brad for additional color. Yes. Not sure I have a lot more to add, Bruce. On the Apple front, we have a great relationship with Apple and we stay focused on giving them great service and we think we do that and it's a good relationship. On Pearl, we're very pleased with the product. It's performing credit wise the way we expected. Good demand for the product. We have stayed in the prime plus space. We've stayed at the very, very high end of the market. I think there's opportunity to go in the credits back from there, but at this point, we're staying focused on our niche sticking to our knitting and staying in that really high credit quality area and feel very good about it. Thank you. Okay. And your next question is from the line of Erika Najarian, Bank of America. Your line is now open. Hi, good morning. Thank you very much. Could you just following up on Ken's question, could you give us a sense of On your variable rate loans on the asset side, if you could give us a sense of what the short term benchmarks are? And on the liability side, if your long term debt is swapped out, and if so, what the underlying benchmark would be? Thank you. Sure. I'll jump in on that one. So basically on the floating rate side of things, you have a couple of key benchmarks in the C and I book. It's primarily 1 month LIBOR, although we do have a few $1,000,000,000 of 3 month LIBOR indexed on the commercial side, but generally it's a 1 month LIBOR book. And when you think about the other big floating books, you've got the home equity portfolio, which is essentially a primarily a floating rate book there. And the what we swapped that to is actually 1 month LIBOR and 3 month LIBOR as well. There's a mix there with frankly the majority of that actually going to 1 month LIBOR. And when you think about what's contractual with With respect to 3 month LIBOR on the asset side and 3 month LIBOR on the liability side, we've been monitoring that because of what's been going on the 3 month and 1 month LIBOR over the quarter. We're pretty balanced, at least contractually with respect to of the asset side and the liability side of the 3 month point on the curve. So let me know if that's responsive to what you were looking for. No, that was very clear. And a follow-up question is, of course, we'll hear more about your new about top 5 in July. And given how successful these initiatives have been, I'm wondering if you could give us a sense on how much of top 5 will revenue driven rather than expense driven. Sure. I'll start, John. You can add color. But I think each year, what we try to focus on is an effort around efficiency and extracting inefficiencies to streamline how we're running the bank, and we'd like that to make up, I'd say, at least 40% of the pot to whatever total number we get to. We also then have always great ideas in terms of how we can serve our customers better and deliver additional products and services or expand into some new adjacencies as we've done, for Sample geographically into the Southeast region on the commercial side. So I think there's opportunity there as well. And I'd say what we find heartening here is that We're able to come back and do this year in and year out, which I think sets us apart really from peer banks who might have a major, major program maybe every 3 years or so, but we've tried to instill this into our culture and our DNA at Citizens that It's our responsibility to come up with these ideas about how we're going to run the bank better and do more for our customers and do more for our shareholders. So, John, maybe you could add some additional thoughts. Yes. Just maybe bigger picture, when you think about our targets for ROTCE progression over the medium term that we talked about last quarter. We built in that there would be on the expense side Something on the order of 60 basis points over that period of increasing our ROTCE. And if you triangulate that Act to our expense base that comes in somewhere between 1% 2% of our expense base in savings each year coming out of top. That's been an incredibly important part of how we're driving expense saves. So we'll continue to do that. Thank you. That was clear. Appreciate it. Okay. And your next question comes from the line of Saul Martinez, UBS. Your line is open. Hi, good morning. On your on asset quality, the 4.25 to 4.75 That obviously implies a pretty big ramp up and you mentioned that there's a high probability of being below that But I guess a couple of fold question. One, why not just change the guidance, but maybe more importantly, just as you look across the different parts of your portfolio, obviously credit remarkably good, but are there any areas that either you're concerned about or that you're watching a little bit more closely as being a little bit more vulnerable to normalization in credit. Yes. So I guess to my earlier answer, we don't want to be in the habit of updating our full year guidance quarter in and quarter out, which is why we're I think the beat on credit is materially enough outside of that range that I think we needed to call that out. So that's the answer to the first part of your question. On the second part of your question, I'd say certainly on the consumer side, there's nothing in terms of delinquencies or roll rates that gives us pause. So I think we're going to have a very good clean year on consumer credit. And again, on the commercial side, We have a net recovery position, which is pretty fantastic. But again, when you look at what we have in NPLs, what we have in criticized assets. We're in very good shape there as well. So, you're likely over time to take a hit here or there, maybe you have a recovery that allows you to offset it on the commercial side, but we could see that migrate up a little bit over the course of the year. Specific portfolios, they all look in pretty good shape. Energy is certainly in great shape. We're keeping our eye in the franchise world on some of the Casual Dining segment, but that's relatively modest and I think that'll behave okay. But Anyway, I'd say those would be the areas I would highlight. John, anything you'd want to add? No, I would just add to the point on the consumer delinquencies, even The 30 to 90 day delinquencies quarter over quarter and year over year are down. So we're just seeing good trends there and things we're struggling with are generally idiosyncratic and not that large. So we feel very good about where we are. Good. That's helpful. And Just on deposit competition, you mentioned deposit pricing, you mentioned cumulative betas around, I think mid-20s. But you just give a little bit more granularity across the different businesses, retail, commercial, wealth, where you're at, What's the dynamic and also where you feel betas are maybe relative to where terminal beta could be for each of those segments? Yes. I'll tell you what, we'll talk about the terminal betas maybe top of the house. We don't haven't Necessarily gotten into where it would be across each individual segment, but in terms of within consumer, you'll see terminal betas that are lower than commercial, But overall, we've mentioned that through the cycle, we would be at approximately 60% cumulative beta over the entire tightening cycle, which we tend to think about at approximately a 300 basis point or so Fed Funds number. When you break that down, as I mentioned, consumer on the lower end, commercial on the higher end. Within consumer, we are breaking that down a little bit further. When you look at the core consumer in the retail space as well as even when you get up Mass affluent, we're seeing betas being pretty well behaved in the low single digit range. It's when you get into the wealth sectors that things start to get a bit higher and those betas get up into the high 20s and the low 30s. But overall still very solid single digit betas cumulatively through the Q1 in the consumer side. On the commercial side, you'll see cumulative betas that are maybe a bit higher than that and maybe up into the 30s or so. And that gives us the overall cumulative beta in the mid-20s. So let me see if that's responsive and if there's any follow ups. No, no, that's helpful. So if I think about the 60% cumulative beta, obviously, commercial is going to be above that and All the retails are signature. Yes. Commercial is 70 to 75, let's call it, terminal cumulative In apples to apples related to that 60 and for consumer maybe 35 to 40 to give you something to anchor to with respect to the 60. Got it. Thanks a lot. That's helpful. Okay. Your next question comes from the line of Vivek Junja, JPMorgan. Your line is open. Thanks. Bruce, a question for you. I had a question on capital return overall. I just wanted to talk to you about dividend payout. Where do you see that going? I know you've had good But obviously, you're still well below peers and recognizing, yes, you're still relatively in your infancy after the IPO. But what are you thinking since the Fed has now said the 30% line has also been removed And your peers are talking about 40% type, you're getting to those levels? Yes. No, I think we've said that Kind of in the medium term, we were targeting to get back up around 40% or so. And you saw us make 2 moves in the last CCAR cycle, very significant increases. One of the challenges we've had is our earnings have grown so quickly that you end up actually lagging where you'd like to be in terms of your payout ratio. So again, as we get more flexibility under the new kind of Fed proposal, then Potentially, we could accelerate as we're growing our earnings if we are exceeding our estimates we set out at the beginning of the year, potentially we Move be more responsive and move that dividend up quicker. But again, I think bank stocks should trade with a healthy yield. We understand that. I think we currently with our capital surplus can have our cake and eat it too. We can continue to have nice loan growth and support the organic needs of the business and certainly return shareholder capital at a good clip, and the dividend would be the top of our list in terms of what we want Question for Don, since I heard him on the line. Don, any color on sort of What's giving you the confidence that some of the slowdown we saw in capital markets activity in Q1 should start to dissipate So what are you seeing that's giving you in terms of timing and that it actually should start to pick up? I'll repeat what Bruce said. We started the year with pretty weak pipelines actually. And literally since early February, we've just seen them build and build and build and build. So the activity levels on the teams are quite strong right now. We're We're seeing it flow through already on the fees that we're printing for the quarter. So we're confident in both our clients' desire to transact given the environment and the tax rate and general growth that people are seeing. Sponsors are quite active right now, and we're seeing it in our pipelines. And I would say also Vivek that we would expect to see M and A pick up as the year goes by. And We feel, it's fortuitous or maybe we were good, but doing the acquisition of Western Reserve last year gave us the capability that we can now really serve those middle market companies that are looking to use acquisitions as part of their Strategy. And when I say pipelines, I'm talking about M and A also. And I think we're actively adding to our M and A teams because they can't handle the business that they have in house right now. So it's Great. Thank you. Your next question comes from the line of Martin Mosby, Please go ahead. Your line is open. Thanks. A very detailed question, but we have heard a lot of pressure from the mortgage banking and production side and some mention of gain on sales. Sometimes that's when rates are moving higher, you kind of Are repricing fast enough? That just is a kind of a norm that you get a little bit of squeeze temporarily. Is this More pricing or rate related in a sense of maybe gain on seller margins going down a little bit this quarter? Yes, I think that is it's more a function of as volume comes down with higher rates, The industry is trying to fill up the capacity that you have the excess capacity you have available and you see as the squeeze on Margins. So I think it's just a normal market activity as people are trying to fill up the capacity they have. Got it. And then when we think about your capital ratios have been relatively flat. As you now move into the next phase with more flexibility on returning this capital. Do you envision meaningfully kind of bringing that number down? Do you have kind of a target you'd like to get to in the next couple of years? Yes. So the flexibility actually comes down the road. So it's not really here yet in terms of the CCAR cycle. So I think we gave guidance for this year that we'd like to bring our capital ratio down towards 10.7%, 10.8%, if you look at our full year guidance. We also set out our medium term targets, which we said we'd like to bring it down to 10% to 10.25%, when we set out those targets. So you could see us at 11.2%, bring it down 40 basis points and then do that again and then continue to chisel it. And it may be the case that The median moves lower and that there's opportunities for us to move below that range, but that's the kind of flag that we planted at this point in our planning process. Yes. Maybe just to add on top of that, I think versus Wright. I mean, that flexibility point that we're very pleased and supportive of is really an NPR. And we're working our way through that process with The Fed and if all goes as originally indicated, this would be a CCAR 2019 cycle that where the flexibility would come later in 2019 and into 2020. We're supportive of it, taking away The soft cap on dividends and addressing some of the concerns from the industry around balance sheet growth is all very positive. Lots more questions And it's Positive in the sense that you have so much earnings growth right now with tax benefit and just the organic growth, The payout ratios are going to be a 2019, 2020 that keeps the momentum into the last 2 years or that next 2 years after we get the pop in earnings really creating a lot of the give back this year. Yes. Okay. Thank you. Your next question comes from the line of Gerard Cassidy, RBC Capital Markets. Your line is now open. Thank you. Good morning, guys. Can you share with us, You had some as you pointed out, some nice growth in your demand deposit accounts, which some of your peers haven't really seen. And when you look at that, could you share what percentage of your consumer customers have checking accounts where There's no fees associated with them because either they keep a higher balance or there's a special product that they're using that doesn't charge them fees? To give you a percentage that don't have fees, I unfortunately don't have that in front of me. I will tell you our core checking products. So our sort of our baseline checking product, is something we call 1 deposit, which is You have the ability to waive your monthly service charges just by making a single deposit every month. So the majority of those Do not incur a fee, but in terms of an overall percentage, I don't have that available. Yes. Okay. Thank you. And then, Bruce, Obviously, as you pointed out, you're relatively new as a publicly traded company, you have very strong capital. Of course, You've got a glide path to give it back to shareholders. Another angle would be, of course, to do acquisitions. Could you just Give us your views on what you see on the merger landscape for other departments over the next, let's call it, 12 to 24 months? Yes. I think, Gerard, we've been pretty clear that where we're focused In terms of looking for acquisitions would be really in the fee space. So it would be adding to our capabilities, As I'd like to say, getting a little farther down the track faster in areas in the commercial side and capital markets or on the consumer side in wealth or in mortgage MSRs, for example. So those have been the areas that we have interest, and we've had dialogue, and I think we'll eventually do some more things this year, much like we did the Western Reserve M and A boutique last year. So, I think there'll be of probably modest size because we have a lot of organic growth. And so we want to stay focused on executing our plan, but then supplement that with things that we can easily plug and play. The other area that I think we're focused has been on the FinTech space. And so we have about a half a dozen relationships currently with various FinTech partners and Some really great stuff, our specified digital wealth offering, our business banking loan origination and fulfillment platform that we have with Foundation, just to name a couple. But I think our antenna is out and we probably could add A handful of additional ones also this year. So when it comes to straight depositaries, That's really not on our shopping list, and you won't see us looking to do that in 2018. Great. Thank you. And your next question comes from the line of John Pancari, Evercore. Please go ahead. Your line is open. You had mentioned the better loan beta, where you're trending right now. How much of that is The pricing environment, I mean, we're hearing that it's certainly not terribly accommodative right now and that there's some spread compression a lot of your peers are dealing with. And then therefore, how much of that is also just your structure and that you've got a fair amount of portfolios that you're still subscale in, but are higher yielding and you're growing there, so the remix is helping your loan yield. Thanks. Yes. I'll go ahead and hit that. I mean, loan yields up 14 basis points in quarter. And you think about converting that into a beta, I mean, that's really driven by our floating fixed mix. And we're basically about 52% or so as I recall the percentage swap adjusted floating loans versus the approximately 48% on the fixed side. So that's the big driver in loan betas. And you heard a little bit earlier the indices that we're exposed to that's the indices are going to be primarily 1 month LIBOR and Fed funds in terms of driving that beta on the loan side. And You could think about that beta cumulatively being around 60% or so. When you think about a much higher beta On the commercial side, say, call it in the 80s being offset by more of the term lending that sits on the consumer book. So I think that's how you should think about our loan betas on that side. Okay. All right. Thanks. And then actually on that front, the New money loan yields where you're bringing on new production, do you have that for commercial versus consumer? Yes. I mean, so I would say overall, on the commercial side, new money is coming in, call it, 25 basis points or so over runoff money. And then on the consumer side, basically every book, New money coming in, in a healthy way over runoff with maybe the possible exception of mortgage where you've got The negative or the convex aspects of that kind of portfolio where you see the bias towards refinancing the higher rate stuff. So I think that's a natural industry related phenomenon. But basically, across the board, when you run the table across consumer and commercial, we're in a situation where our new front book is accretive versus our runoff, and that's providing upward lift as well, and we'll continue into the second half. And that extends, John, to The securities book as well. Absolutely. On the security side, our runoff is about 250, our reinvestment is about 320 on the securities side. Got it. Thank you. That's helpful. One separate thing on the expense side. I know you indicated a couple of times that you're to invest heavily in IT. Can you remind us of the size of your IT budget? I believe you had previously indicated about $195,000,000 in CapEx. Just wondering what the overall IT budget would be in terms of the non GAAP? Yes, we went to a period probably from 2010 to 2016, there are probably 6 years there. We had it up around 250. We pulled it back a bit last year to the 195 as you said. I think we Needed to pause and digest some of the things that we'd put in place. But this year, I'd say we're probably in a 225, 235 zip code. And the nice thing that I'd say about that is, It's really moving and pivoting towards offense. So much of that spend now is directed at how do we serve customers better, how do we digitize, how do we use data. And so I think there's an unlimited appetite that folks have inside the company and I remind folks Rome is not built in a day, we have But I think we're really spending much more on offense and the results are showing by you can see the awards we're picking up for customer experience or Best Bank. I think it's really great to see. Maybe just to add to that just briefly, Because of the way accounting works and there's some capital budgets and across peers, sometimes it's hard to normalize apples and apples. But Some of the industry materials that we've been able to get our hands on would indicate that maybe in the neighborhood of 8% of revenues is about where our peers are coming out. And you would see us on an apples to apples basis being around 10% of revenues. When you consider our capital expenditures plus Some of the things that get expensed and the other support from an IT perspective of the businesses on a customer facing standpoint that so when you think about it like that, We feel like we're in line or in pace with the industry or maybe a little better. Got it. All right. Thank you. And your next question comes from the line of Ken Usdin of Jefferies. Your line is open. Your line is open, sir. Ken? David's question got answered. Okay. Next, Is there anyone else, Kevin? No. At this time, we have no further questions in queue. And with that, I'll turn things back over to Mr. Van Saun for closing remarks. Okay, great. So thanks everyone again for dialing in today. We certainly appreciate your interest and your support. We're off to a really good start. I think we maintain a positive outlook for 2018 and also for another year of strong progress for Citizens Bank. So thanks, and have a good day. Now that does conclude today's conference call. Thank you for your participation. You may now disconnect.